My Two Cents

The way international television business is conducted reminds me of the advice my aunt Yole used to give: When you go to the dentist, cry poverty otherwise he’s going to charge more.

Later on, I learned that the international TV distribution business is based on the same principle.

Throughout the world, goods and services of comparable quality have relatively similar prices. That is, apart from intellectual properties. For example, consumers can buy a Volkswagen Beetle or a Honda Civic anywhere in the world for about the same retail cost. On the other hand, a TV network in the U.K. will pay 50 percent more than one in Germany for the same episode of an American series. At the same time, Germany will pay 80 percent more than Japan.

It has nothing to do with volume (usually costs go down when quantity increases) or market size, since the German TV market is larger than the one in the U.K. and Japan’s is much larger than Germany’s. Also, the U.K. buys more programs from the U.S. than Germany.

In the case of audiovisual content, the sales price in various international TV markets is not dictated by the production costs, but rather by the buyers’ ability to pay.
In business economics, this is called “price discrimination,” and is a term used to describe a pricing policy whereby a company distinguishes between different groups of customers. Each group is charged a different price for identical units of supply. The policy need not reflect cost differences. It is based on a principle of “what the market will bear” economics.

In the international television distribution business, pricing is therefore a market consideration, not a cost consideration. Pricing is based on what the market will bear for the goods or services at hand — regardless of cost.

The “what the market will bear” economic principle states that in a free-market economy, companies discover what the market's willing to put up with and what it’s not, and the companies then pursue profit strategies focused on what the market will put up with. This is valid for both sellers and buyers. In the early days of international TV distribution, when the U.S. TV output was much larger than the market could absorb, prices were dictated by the buyers and, at least in Europe, were pretty stable across the largest countries, even though to the American seller the exchange rate would make the U.K. licensee fee, for example, much larger than the one from Italy or France.

Later on, when demand increased in areas where there was advertising, sellers started to apply the business theory of “fair price” by figuring out how many advertising spots broadcasters would jam into the programs they sold. They would then ask for half of that revenue. At that point, in order to reduce imported programming costs, some countries even attempted to create informal buyers’ cartels, but those were short-lived. The “fair price” approach was also short lived and the industry returned to the “what the market can bear” business model.

The latter model is not valid across the board. Indeed, store owners in the U.S. and other countries, are forbidden to charge what the market will bear because of “anti-gouging” legislations.

So, how are successful TV distribution companies able to leverage the “what the market will bear” economy? By constantly building the customers’ perception of value. The more subtle the difference between competing products, the more often customers need to be reminded of the value of yours. TV trade shows and trade advertising fulfill this role. But marketing is also a function of the amount of business one can handle: more advertising, more business. If a company has little to sell, no marketing can be fully justified. Plus, companies have to know where their products are on the scale of "innovative-to-commoditized." This is done by keeping the pricing of products ahead of the curve. If products are priced as innovative programs but the product is becoming commoditized (when customers perceive little or no value difference between brands or versions), distribution companies will either need to shift pricing or the customer’s perception to maintain revenues.

In addition, the international TV distribution business is not affected by speculators and it goes against other business trends: it grows even during economic crises. But, while the U.S. domestic syndication business is more numbers driven, internationally personal relationships have an important role: they depend mainly on the executives’ ingenuity. In that sector, the growth of the intellectual properties business depend on people’s intellect after all!

Dom Serafini